Until death us do part ….
Stress is part of life, yes?
But some stresses are more stressful than others.
How would your rank various commonly experienced life stresses?
Well, based on the Holmes-Rahe Stress Inventory, “death of spouse” ranks (drum roll, please) as #1 on the “life stress” event list.
Perhaps that is why we shy away from talking about this painful subject.
Nevertheless, planning for life after the passing of a spouse needs to be addressed, as it is an eventuality.
According to a recent article from AARP Magazine titled “The Financial Penalty of Losing Your Spouse,” the best time to plan is before your spouse dies.
In fact, while you and your spouse are alive and are not “legally incapacitated,” you will have widest range of estate planning options available.
Depending on your unique circumstances, your estate plan can be as simple or as complex as necessary to meet family goals and even estate tax challenges.
Without delay, execute or update your revocable living trust (if you have one) and your respective last wills, general durable power of attorney, advance health care directive, anatomical gift declaration, and HIPAA Authorization.
Remember to review all of your beneficiary designations on life insurance, retirement plans, and annuities.
There is more.
Inventory your assets and any liabilities, identify your essential legal, financial, real estate, tax, and personal documents.
Do not forget to inventory your “digital assets,” too.
This includes the passwords and usernames for everything from your financial accounts, to email accounts, to social media, to online applications (think Dropbox), to your cryptocurrency account.
Oh, and make sure that your credit cards will be available.
Many surviving spouses only learn after a death that the credit cards are solely in the name of the decedent spouse.
Get help from professionals. Once you become a widow or widower, review your new status with your estate planning attorney, CPA, and financial advisor.
This includes evaluating which accounts need to be retitled, beneficiary designations updated, and legal documents revised.
Can you afford to maintain your home?
An experienced professional who works regularly with widows or widowers can provide help, if you are open to asking.
A warning note: Be careful about new “friends”!
Widows and widowers are key targets of scammers, and thieves are very good at scamming vulnerable people.
A good rule of thumb is to make no major changes in your life for at least a year.
Be strategic about Social Security. If both partners were drawing benefits, the surviving spouse may elect the higher benefit going forward.
If you have not yet claimed your Social Security, then you have options.
You can take either a survivor’s benefit based on the work history of your spouse or the retirement benefit based on your own work history going forward.
You will be able to switch to the higher benefit, if it ends up being higher, later on.
Be careful about your spouse’s 401(k) and IRA. If you are in your 50s, you are allowed to roll the 401(k) or IRA of your spouse into your own account.
However, do not rush to move the 401(k).
You can make a withdrawal from the 401(k) of a decedent spouse without penalty.
However, it will be taxable as ordinary income.
If you move the 401(k) to a rollover IRA, you will be required to pay taxes plus a 10% penalty on any withdrawals taken from the IRA before you reach age 59 ½.
Your financial advisor can help with these accounts.
Use any advantages available to you. The IRS will still let you file jointly for the year in which your spouse died.
Tax rates are better for married filers than for singles.
Any taxable withdrawals you will need to take from 401(k)s or IRAs may be taxed at a lower rate during this year.
You may decide to use the money to create a rollover Roth IRA or to put some funds into a non-tax deferred account.
Do not rush to do anything that is not absolutely necessary. Selling your home, writing large checks to children, or moving are all things you should not do right now.
Decisions made in the fog of grief are often regretted later on.
Take your time to mourn, adjust to your admittedly unwanted new life, and give yourself time for this major adjustment.
Reference: AARP Magazine (May 13, 2022) “The Financial Penalty of Losing Your Spouse”